Climate change is undermining insurance systems, leaving American homeowners vulnerable to catastrophes. The devastating Los Angeles wildfires have highlighted the need for a new paradigm in responding to climate risks.
Historically, insurance companies relied on experts to estimate the likelihood of certain events and charge policyholders accordingly. However, with increasing climate risk, traditional models no longer apply. In California’s Fair Access to Insurance program (FAIR), coverage is capped at $500,000 per property, but losses from recent wildfires exceed $250 billion.
The collapse of insurance markets could lead to widespread financial instability, as seen during the 2007-2009 Great Recession. Central bankers have raised concerns about large-scale financial contagion, which can spread quickly and affect global stability. The US Federal Reserve has recognized climate-related risks and has conducted stress tests on banks to assess their vulnerability.
The recent Los Angeles wildfires demonstrate that a new approach is needed. Climate change poses significant threats to financial markets, and policymakers must consider the long-term implications of inaction. As experts, we must work towards developing effective solutions to mitigate these risks and ensure the stability of our financial systems.
Source: https://theconversation.com/im-an-economist-heres-why-im-worried-the-california-insurance-crisis-could-trigger-broader-financial-instability-247620